Government securities are acknowledged for offering steady income and hedge against market volatility. Experienced investors often add these securities into their portfolio in the desire to diversify and reduce risk quotient.
Government securities in India are sovereign bonds issued by the Indian government to raise capital from the market. Since these bonds are backed by the government, they are considered risk-free. But unlike equalities, government bonds have tenure and don’t allow investors to redeem before a lock-in period. This is the reason why some investors might downplay its role. Now if you want to invest in G-Secs, as government securities are also called, here are a few things you would like to know about it.
Government securities are essentially tradable financial instruments issued by the Central and State governments that acknowledge the government’s obligation to a debt. They are initially auctioned off by the Reserve Bank of India to investors when the government is in need of a loan.
In some cases govt securities aid in raising funds for infrastructure projects or regular operations without having to increase tax rates when enough funds aren’t available. These securities also come with a sovereign guarantee as they are backed by the Indian government with practically assured returns. The downside to this is that G-Secs yield relatively lower returns than other securities due to the negligible risk associated with them. Still, they are relatively popular and have seen steady growth over the past decade in the Indian capital market.
Types Of Govt Securities:
They’re generally classified based on their maturity periods into long and short term G-Secs.
Treasury Bills (Short Term G-Secs)
Treasury Bills or T-Bills are short term debt instruments issued by the Union Government with three maturity periods of either 91, 182 or 364 days. These bills do not pay interest, are issued at discounted prices, and redeemed at their actual value at the end of the tenor. Since they don’t offer a return, you may wonder why they exist.
In the case of T-bills, you gain from the price difference. Let’s explain in detail. So if you purchase a 91-day T-Bill with a face value of Rs. 100 at a discounted price of Rs. 90, you will receive Rs 100 in your Demat account from the government after 91 days. Therefore your gain is Rs. 10 from the trade. There are also other short term bills known as Cash Management Bills or CMBs that are issued for less than 91 days.
Dated Securities (Long Term G-Secs)
The other popular form is long-term G-secs.
One of the fundamental differences between T-bills and long-term bonds are, T-bills are exclusively issued by the central government. State governments can issue only bonds and dated securities, in which case they are referred to as State Development Loans(SDLs). Additionally, bonds generally have longer maturity periods and pay interest twice a year. Their nature may vary based upon the availability of floating or fixed interest rates, protection against inflation, put or call options, special subsidies, links to gold valuation, tax exemptions and their method of issue. Each bond has a unique code of its own, indicating its annualized interest rates, typology, year of maturity and source of issue.
- Trading In Government Securities In India:
Government securities in India are most often sold by auction where the Reserve Bank of India allows for bidding either based on yield or prices. This occurs in the primary market where they are newly issued between banks, Central and state governments, financial institutions and insurance companies.
These govt securities then enter the secondary market where these organizations sell the bonds to mutual funds, trusts, individuals, companies or to the RBI itself. The prices are fixed based on those paid at the auction, making it a crucial step in determining the prices of these bonds. Commercial banks owned the single largest portion of these bonds in the past although their share of the market has gone down in recent times.
Once allotment is done, afterwards they can be traded like normal securities in exchange or to any institution or individual of your choosing. It’s fairly similar to most stock trades except that the minimum investment is Rs. 10,000.
Government bonds are favoured for their relatively risk-free nature. These bonds aren’t affected by market volatility and still can be traded like regular stocks, thus liquid. Although the return is less, these are preferred for hedging against risk and lower risk exposure of the portfolio.